October 23, 2012

Will the Market Bear the $400 per Hour Associate?

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Ask Bill

Will the Market Bear the $400 per Hour Associate?

By K. William Gibson

Q. Bill, I was shocked to read recently that some big city law firms are billing their associates’ time at rates of more than $400 per hour. Can this be true?

A. The thought of $400 per hour shocked me, too, because I was under the impression that corporate clients were putting pressure on law firms to rein in legal costs. So I called William C. Cobb, of Cobb Consulting in Houston, who has been consulting with law firms since 1970 and has written extensively on pricing legal services. He confirmed that at least for the big New York City firms, it is true they are billing that much for associates.

When I asked him how they can get away with it, he responded that in some cases, they simply can’t. According to Cobb, one major client of several big firms refuses to pay any more for associates with less than two years’ experience than it would have to pay for legal assistants. Such clients are only willing to pay the higher rates in cases they consider to be “nuclear events,” where they can justify spending shareholders’ resources to defend the company with the most expensive resources available to prove that they “hired the best.” Some will also pay the rates if “they have had enough experience with an associate to know that the associate understands the company’s business and issues.” But the problem, Cobb notes, is that the law firms still believe that all work falls in the nuclear event category and justifies the high rates.

The Tipping Point on Costs

I also asked Cobb about the trend toward corporations putting pressure on law firms, and he said that corporate clients are slowly coming around to ask for lower rates in both “brand name” and “commodity” legal work. (Years ago, Cobb first wrote of the “value curve” for legal work, in which he identified “high-value” work as being high on the curve and justifying higher rates, while “commodity” work is lower on the value curve and deserving of lower rates.)

He then pointed to a bidding process that General Electric undertook not long ago for its legal work, as well as the efforts of other corporate general counsel, including Microsoft’s, to “demand more effectiveness, efficiency and responsiveness from outside counsel.” He predicts that the legal world is “beginning to reach the tipping point where, like an epidemic, the socialization of new ideas will spread very fast.” One of the accelerating facts is the corporate counsel’s frustration with what lawyers are earning compared to the compensation of in-house attorneys and corporate executives. When this epidemic hits, Cobb predicts, “it will shake up the legal profession, its culture and its compensation system.” What’s more, it will open up opportunities for smaller firms who have outstanding lawyers who bill at much lower rates because large firms will be forced to outsource legal work to these lawyers to reduce the cost of delivering legal services. So, when will this epidemic strike? Only when enough clients reach the tipping point, Cobb says, and “force the changes on the lawyers to get a horse in the race.” He advises that we are quickly building toward that point.

I also spoke with Marc Capelluto, procurement manager for Microsoft’s legal operations. His take on the problem is simply that “companies are increasingly looking at cost drivers and the overall cost of matters. Companies want fiscal discipline, such as budgets and good project management to ensure they get the best value for their (often considerable) expenditures.” Capelluto goes on to say that firms may continue billing by the hour, but those that do “will find that companies will give a great deal of scrutiny to what they charge for, as well as how much they charge for it.”

The Law of Gravity

Bill Cobb and Marc Capelluto agree that vision and creativity will serve law firms well in the future. Cobb observes, “The law firm that has the map and the process for delivering legal services in the most efficient manner will be key in the next five years.” Capelluto’s prediction is that companies will “gravitate to those firms that find creative solutions to the need of corporations to drive down the spending of their legal departments.”

I have to say, in light of their comments, it is difficult for me to see how routinely charging $400 per hour for an associate’s time can be considered to be part of any law firm’s “creative solution” for its clients’ legal needs.